The Ups And Less-frequent Downs Of Arms

May 4, 1986|By Bill Sing, Los Angeles Times

When interest rates on new fixed-rate mortgages began hitting 10 percent and lower earlier this year, Anadelle Johnson thought that the rate on her adjustable-rate mortgage, which was at 13.28 percent in December 1984, should have dropped to single-digit levels, too. But to her dismay, Johnson's rate only went as low as 11.27 percent in January.

''I was disappointed that it did not go down faster,'' said Johnson, 35, a Castro Valley, Calif., medical-products company supervisor. Frustrated, she and her husband refinanced their loan, obtaining a new mortgage at 10 percent.

Johnson is one of thousands of homeowners who have been surprised, disappointed, confused and upset that rates on their adjustable-rate mortgages have not declined as fast or as far as they hoped. Despite recent sharp declines in overall interest rates, rates on many of these mortgages have fallen only slightly, if at all. In some cases, the rates have actually risen. The confusion and complaints are seen as a major reason for continuing consumer disenchantment with adjustable-rate mortgages. With single-digit interest rates on fixed-rate mortgages available for the first time in nearly eight years, three out of four consumers buying homes today nationwide are choosing fixed-rate mortgages, compared with less than half in 1984.

Homeowners unhappy with how slowly their ARM rates are declining are refinancing them into fixed-rate mortgages. In many cases, they can get lower rates on fixed-rate loans than they have on their current ARMs. Usually, for new loans, ARM rates are from one to two percentage points below fixed-rate mortgages.

''If rates were going down faster on ARMs, there would likely be renewed confidence in ARMs'' and refinancings would not be as attractive, said Richard J. Rosenthal, a Los Angeles Realtor and president of the California Association of Realtors.

The disenchantment with adjustable-rate mortgages may make it harder for savings and loan companies to make them in the future, some analysts say. And that could hurt the S&Ls, some of which make only adjustable-rate mortgages, having abandoned fixed-rate mortgages in the early 1980s because of the risk that rising interest rates would make those loans unprofitable.

Lenders and regulators acknowledge that many ARMs are not declining as quickly as overall mortgage rates. But they say that the index's stability generally is good for consumers, because when overall interest rates rise, ARM rates will not rise as fast. The protection from payment increases is more valuable than the benefit from payment decreases, they argue.

They also say the complaints are due more to consumer confusion and misunderstanding than to lender abuse. Lenders, they say, are simply following the terms of their contracts -- terms consumers should have been aware of when they took out the loans.

S&L executives say the problem is likely to subside if interest rates bottom out or move upward.

''Anytime you have an environment when rates are going down, people are going to start questioning why their rates are not going down as fast as they want,'' said David Meders, head of consumer affairs for the San Francisco branch of the Federal Home Loan Bank, which regulates the S&L industry. Meders estimates that consumer complaints to the agency are 10 percent above normal. The new round of complaints is the latest in a series of problems that has plagued ARMs since their introduction in 1981. S&Ls and other lenders have aggressively marketed the loans to shift all or part of the risk of rising interest rates to borrowers.

But lenders have been hit for offering artificially low, introductory ''teaser'' rates which, critics say, induced unqualified borrowers to take the loans. Other critics have complained about the lack of uniformity in the terms of the loans, which make it hard for consumers to compare different loans. Still others have accused lenders of misleading or inadequate disclosure of loan terms. These and other problems have sparked several lawsuits against lending institutions and moves for legislation providing for greater regulation.

The latest spat centers on the heavy use in California of an ARM index that moves more slowly than overall interest rates.

Most of the nation's ARMs are tied to one-year Treasury bills, which tend to move equally along with general interest rates. But rates on most California ARMs are pegged to an index determined largely by rates that savings and loan associations pay on savings deposits.

That index, called the 11th District cost-of-funds index (the 11th District includes S&Ls in California, Arizona and Nevada) is calculated monthly by the Federal Home Loan Bank of San Francisco. S&Ls and others typically tack on a profit margin of between two and three percentage points to that index to determine the actual rate that borrowers pay.